If you’re a dentist that owns a dental practice, you’ve likely had at least one phone call from a private equity acquisition team. In the past, private equity acquisitions in healthcare were often limited to hospitals and large doctor groups. But today, this form of acquisition activity is increasing in the dental practice and Dental Support Organization (DSO) space.
This creates an interesting new exit opportunity for dental practice owners. In many cases, these private equity acquisition teams offer higher purchase prices than an individual buyer, access to capital for expansion, centralized administrative support, and the possibility of retaining an ownership stake in a larger organization.
However, these transactions are complex, and they fundamentally change the relationship you have with the practice. There are also changes to how finances, debt, and operations are handled across the entire business.
This means that practice owners need to look past the higher offer price and consider whether the other changes fit with their long-term goals.
If you’re considering selling a dental practice to private equity, our guide will walk you through the pros and cons and explain what to expect, so you can make the right exit decision for yourself and your business.
The growth of corporate dentistry is part of a broader shift in how healthcare service businesses are owned and operated. The percentage of DSO-affiliated dentists has been steadily rising, and this rise has been more prevalent among new dentists.
These dental DSO trends and the fact that many dentists are reaching retirement have created a large consolidation opportunity in the industry. In some states, as many as 40% of practicing dentists are 55 years or older and considering an exit.
While private equity-backed DSOs continue to acquire practices across the country, they aren’t simply buying every practice that comes to market. Each group has its own investment criteria based on factors such as specialty, geography, practice size, profitability, growth potential, and strategic fit. Some buyers may pay a premium to establish a presence in a new market, while others are focused on expanding within regions where they already operate.
The number one thing that’s going to get your attention is the offer price from a private equity firm. DSOs backed by private equity routinely pay more than other buyers would. But once you look past the opening number, this is where things can start to get more complicated.
Private equity-backed DSO deals generally split the payment into cash and equity. The cash is paid directly to you at the close of the sale, and the rest is rolled equity in the DSO. If the DSO grows and later sells or refinances (something PE-backed groups tend to do every few years), your stake can pay out a second time, sometimes for more than your original sale.
You also can get access to capital you may not be able to raise on your own. This can be used to make needed improvements to the practice, bring on staff, or follow through with marketing initiatives to grow your patient base.
All of this can be done without risking your personal assets.
One of the first questions most dentists ask about a DSO offer is, “How long will I have to stay?” In most private equity-backed DSO transactions, sellers are expected to continue practicing for approximately 3-5 years, although the number of clinical days or hours worked each week often decreases over time.
By comparison, in a traditional dentist-to-dentist sale, your transition timeline is largely negotiable, giving you much more control over how long you stay involved after closing.
You’ll also want to consider that the equity stake you take at closing isn’t the same as cash. The value is tied to the overall performance of the larger DSO, so you have minimal control over that outside of your own practice.
In some transactions, the deal structure can become even more complex. For example, a buyer may ask the selling doctor to allocate 5-10% of their rolled equity into an incentive pool for key associate dentists and other valued employees. While this can be an effective way to retain and reward the team that helped build the practice, it’s another component that can affect how your equity is ultimately structured.
Another potential downside is that timing is critical during this frenzied acquisition period happening nationwide. Interest rates, the availability of investment capital, and a DSO’s growth strategy can all influence valuations. For example, a DSO entering a new market may be willing to pay a premium to establish market share, while more established private equity-backed groups are typically disciplined, numbers-driven investors.
So, if you’re considering being acquired via a private equity-backed DSO, it needs to fit your exit timeline. If not, you could miss the window, and your plans may be altered.
Before the sale, the pitch you’ll hear is mostly centered around scaling. Things like centralized billing, sourcing supplies, and compliance are all handled for you. This part is true, and the lightened administrative load can help you focus on scaling your practice and delivering better care if you choose to stay after the sale.
But as with any deal, buyers expect something in return, and this is what catches most dental practice owners off guard. If you continue to work at the practice, there will generally be production targets that you’re expected to meet, along with meetings with managers who may have more of a final say than you do.
Next, you’ll have less flexibility in your day-to-day operations than when you owned an independent practice. If your practice ran a certain way for the past 15 years and it worked well, you’ll still need to adapt to the DSO’s centralized systems and operations.
There’s no way around this, and it can be jarring for some dentists who didn’t know exactly what they were signing up for.
If you choose to leave the practice after the sale, your former team and staff will need to adjust to this cultural and operational shift. For dentists with a dedicated team that they’ve been with for years, this may be something to carefully consider.
The distinction between clinical autonomy and operational autonomy is at the heart of the corporate dental vs. private practice debate. After a sale to a DSO, a dentist may retain complete authority over diagnosis and treatment, but have considerably less control over the administrative conditions surrounding that care.
As a result, your team will often feel this cultural shift more than you do. Staff used to a small, owner-run office will notice slower decision-making or new approval steps for things that used to be a quick “yes”, and a corporate feel replacing the culture you built over the years.
All of this doesn’t mean that selling to a DSO is a bad choice. It just means you need to be aware of what control you maintain and what you give up, and ensure your staff is prepared for those changes, whether you stay on board or not.
If a private equity buyer is interested, it’s always worth considering. However, you still have other options that you can consider.
Selling to a private buyer: This will generally result in a lower final sale price, but it’s generally going to be an all-cash deal where you walk away with the full amount at the close. There’s also no requirement for you to stay and work if you don’t want to. While it has certain drawbacks, these deals can provide the cleanest break and fastest exit. They also tend to be the most seamless for your former staff and team members.
Other strategic buyers: While private equity gets a lot of attention, there are still other strategic buyers out there. These include other dental groups in your region or non-private equity-backed DSOs. These groups may have different goals than a private equity-backed team, and they may fit better with your overall goals.
The right choice comes down to how soon you want to exit, how much say you want in patient care and daily operations after closing, and how comfortable you are holding a piece of a company you no longer control.
As you can probably tell, selling a dental practice to private equity is complex, and these deals involve far more than just choosing the highest bidder.
These are decisions that affect you, the practice, your existing staff, and impact all of those things for years to come. That’s why it’s so important to work with a broker who understands these complex deals.
At Lakeshore Dental Brokers, we’ve brokered countless deals with private equity firms and understand exactly how these deals are structured. We can explain your full set of options so there are never any surprises, and you can make the best decision possible.
Most importantly, our brokers can ensure you get the full value of your practice. Private equity buyers are shrewd, and you need someone in your corner who understands the underlying mechanics of these complex acquisitions.
Contact one of our brokers today for a free, no-obligation consultation. Remember, the sooner you start to plan for your exit, the more advantages you will have when it comes time to negotiate with buyers.
Understanding your baseline is the first step toward maximizing your worth. Let’s start with a free, no-pressure valuation – and I’ll walk you through the whole process from there.
Prefer to talk it through? Contact Lakeshore Dental Brokers.
